Work-Centered Welfare for the Twenty-First Century

Poverty and economic inequities are mounting in Japan, even as social security outlays balloon. Miyamoto Tarō calls for a new model social security centered on employment to address the needs of Japan’s working-age population in an era of labor mobility.

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If government outlays for social security are a valid indicator, Japan can be considered the first true welfare state outside of Europe. According to statistics compiled by the Organization for Economic Cooperation and Development, Japan spent 23.1% of gross domestic product on social security in 2011, surpassing Britain (22.7%) and coming within a hair of the Netherlands (23.5%). Japan’s social spending dwarfs that of other East Asian nations, including second-ranked South Korea, which spends a mere 10% of GDP. Today Japan is, hands down, the preeminent Asian welfare state, at least from the standpoint of government spending.

Unfortunately, high levels of social spending do not necessarily equate to success in coping with such social challenges as poverty and depopulation. Despite rising social security outlays, poverty is a growing problem in Japan. Among working-age women, the poverty rate has risen to 12.6%. In the Netherlands, which spends roughly the same percentage of GDP on welfare, the poverty rate for women is just 4.6%. With poverty mounting among single-parent households, Japan’s child poverty rate has risen as well, reaching 14.9% according to figures compiled by UNICEF. Child poverty in the Netherlands, by comparison, is just 5.9%.

Japan is faring little better when it comes to dealing with the demographic challenges facing the welfare state, having made no significant progress stemming population decline. In the spring of 2014 a private think tank sent shockwaves through the nation with a report warning that by 2040, half of Japan’s municipalities could face extinction owing to depopulation.

Japan’s Lopsided Social Security System

Until the beginning of this century, Japan was spending less on social security than the United States as a percentage of GDP. Yet its poverty level was much lower, as was its Gini coefficient, a measure of income inequality. Poverty and income inequality have risen as social spending has ballooned. What accounts for this paradox?

The answer is that Japan’s welfare system is structurally skewed toward support of the elderly via pension and healthcare benefits. The increase in spending in recent years is almost solely the result of rapid demographic aging in combination with this lopsided budget structure. Japan’s cash benefits to the elderly amount to 8.8% of GDP, far above the OECD average of 6.9%.

Among the working-age population, meanwhile, economic hardship is on the rise. While the shift toward temporary jobs and other forms of “nonregular” employment has more and more people struggling with unstable and inadequate employment, the government is doing little to support working-age people through such programs as job training and daycare services. Japan spends only 1.4% of GDP on family-oriented benefits and services, considerably less than the OECD average of 2.2%. Japan’s working-age population pays heavily to finance welfare expenditures that overwhelmingly benefit the elderly.

With poverty and income equality growing despite ballooning social security expenditures, it is easily to conclude that the Japanese welfare state is an irredeemable failure. But the outlook is by no means hopeless. In fact, I believe the key to a bright future lies in a revival—with twenty-first century adaptations—of the emphasis on job security that defined the Japanese-style welfare state until the mid-1990s, distinguishing it from its Western counterparts.

Equality Without Redistribution

How was Japan able to maintain a stable society with a low poverty rate and a high degree of income equality despite limited social spending? Some may point to rapid economic growth, but without some mechanism for distributing the fruits of growth to every sector of society, economic inequality inevitably grows along with the economy. In fact, Japan had such an equalizing mechanism, but unlike the typical welfare state, it did not rely on the redistribution of income via social spending.

Economic Inequality Before and After Redistribution by Country, Mid-1990s (Gini Coefficient)

Before redistribution

After redistribution

Redistribution rate

Germany (1994)

0.436

0.282

35.3%

US (1995)

0.454

0.344

24.5%

Sweden (1995)

0.487

0.23

52.9%

Japan (1994)

0.340

0.265

22.0%

Source: Burniaux et al., 1998.

Instead of focusing on the redistribution of income through social spending, Japan invested in employment security. The practice of long-term employment, one of the well-known features of Japanese-style management, was the most obvious component of this job-based welfare system, but there was much more to it than that. Another means of providing employment security was through massive government spending on public works projects. In the mid-1990s, Japan was spending 6.4% of GDP on public works, far more than other OECD countries. Lavish infrastructure and construction projects helped stabilize employment outside of the major metropolitan areas. The government also maintained a wide range of tax and regulatory policies to protect small and medium enterprises, including countless mom-and-pop retailers and distributors. Together, these measures helped ensure stable employment—at least for Japan’s male breadwinners—in virtually every industry, regardless of productivity. Until the mid-1990s, Japan never saw unemployment rise above 3%—an exceptional achievement.

This postwar system of job-based welfare was predicated on the model of a male breadwinner who single-handedly supported his wife and children with his employment income. To support this model, the tax and pension systems provided breaks for families with full-time homemakers. With the men assured of steady jobs and the women devoting themselves to childcare and nursing care, the government was able to focus its social spending programs on the golden years, after the male breadwinner’s guaranteed employment had come to an end. The current bias toward the elderly was thus an outgrowth of Japan’s job-centered welfare system.

Turning Point for Japanese Employment

By the mid-1990s, however, the forces of globalization and deindustrialization had begun to erode the foundations of stable employment. A report titled “Japanese Management for a New Era,” issued by the Japan Federation of Employers’ Associations, recommended that the long-term employment guarantees and other job benefits traditionally extended to all full-time workers be limited to a select group of employees. By 2000, the rate of expenditure on public works as a percentage of GDP had fallen to half of the peak level. Meanwhile, deregulation was dismantling protections for workers as well as small businesses. In 1995, the number of non-regular employees in Japan passed the 10 million mark, and as of 2013, such employees accounted for 38.2% of the labor force.

The disconnect between Japan’s traditional job-based welfare system and its unstable employment situation has become all too apparent. Saddled with the burdens but denied the benefits of the welfare state, more and more members of Japan’s working-age population are struggling to make ends meet. Furthermore, as the population continues to age, the increasing economic fragility of society’s younger members is undermining their capacity and willingness to aid and support their elders.

Updating the Japanese Welfare State

What can be done to rectify the situation?

First, I believe we need to acknowledge the merits of an employment-centered welfare system. The dominant theme of welfare reform efforts around the world today—as suggested by such watchwords as “welfare to work” and “activation of welfare recipients”—is a shift from cash handouts to support for steady employment. Japan’s postwar social security system anticipated this movement by several decades.

Any serious blueprint for Japanese welfare in the years ahead should take inspiration not from the Swedish system or the American system but from our own history of employment-based social security. We must give our working-age citizens the wherewithal to thrive if we want their parents and grandparents to thrive; otherwise young and old will descend into poverty together.

Of course, simply resurrecting the old job-based system is neither possible nor desirable in today’s environment. The system I envision would differ from the old system in fundamental ways.

To begin with, the old system encouraged dependence on a male breadwinner by limiting employment security to working-age men. It discouraged women from entering the labor force and has contributed to the rising poverty rate among unmarried women. The new system must extend employment security equally to men and women, young and old. This means providing access to affordable childcare and other services to create an environment conducive to women’s participation in the labor force.

Second, under the old system, businesses and industries took responsibility for employment security by guaranteeing male workers lifetime employment on the understanding that the government would take care of businesses and industries. In today’s highly fluid labor market, employer guarantees have largely evaporated. The employment-based social security system of the future must provide subsidized job training and job placement to help workers move between jobs and industries, whether transitioning from non-regular to regular employment, changing employers, or shifting from the manufacturing to the service sector. In short, we must forge new links between employment and social security. Employers, for their part, must offer greater flexibility in terms of working styles, hours, and other employment conditions in order to guarantee employment opportunities for women and the elderly as well as for younger men.

Third, the old system, which hinged on government regulations and subsidies to business, gave rise to collusion and mutual backscratching between industry and government. To ensure employment stability in our fluid labor market, the government must offer benefits and services equitably by providing them to all qualified individuals—male and female, young and old—as a basic right.

Integrating Social Security and Fiscal Reform

As I noted at the beginning of this article, Japan has made little progress in addressing the struggles of its working-age population despite its ever-expanding social security budget. But all is not lost. By finding new ways to link social security with employment security, Japan can create a more inclusive society while enhancing the capacity of its working-age members to support an aging population. In fact, efforts to restructure the social security system with a view to reviving and renewing the Japanese-style welfare state have been under way for some time.

The reform effort began under the previous Liberal Democratic Party–Kōmeito coalition with the establishment of two nonpartisan councils, set up by the cabinets of Prime Minister Fukuda Yasuo and Prime Minister Asō Tarō in 2008 and 2009, respectively. These commissions conducted the first analyses of the Japanese-style employment-based welfare system while at the same time deliberating ways to strengthen social security to cope with demographic aging and a shrinking population.

Progress in this direction came to a temporary halt after the Democratic Party of Japan came to power in the autumn of 2009, but under the DPJ administration of Prime Minister Kan Naoto, the government reaffirmed its determination to pursue social security reform. In February 2011, the Kan cabinet convened a new reform commission, retaining several key members of the previous two councils. The Kan commission stressed the need to shift from a system weighted heavily toward the elderly to one that addressed the needs of all age groups.

Meanwhile, however, Japan’s public debt had risen to 200% of GDP. With concerns over fiscal sustainability mounting, the DPJ government called for social security reforms geared to the working-age population in tandem with rehabilitation of government finances through an increase in the consumption tax and measures to rein in outlays for pensions and healthcare. This is the policy known as “comprehensive reform of the social security and tax systems.”

Social Security Reform as a Condition for Growth

In December 2012, just before the LDP-Kōmeito coalition returned to power, the DPJ, LDP, and Kōmeito reached an agreement to pursue comprehensive reform of social security and taxes, including an increase in the consumption tax to 10% to help finance more than 1 trillion yen in additional spending on daycare services and other forms of childcare support. The agreement also called for the establishment of a new National Council on Social Security System Reform. In August 2013, the council submitted its recommendations to the cabinet of Prime Minister Abe Shinzō.

Nonetheless, the current government has yet to chart a clear course on social security reform. The Abe cabinet clearly regards economic growth as a higher priority than systemic reform of the Japanese welfare state. After the first phase of the agreed-on tax hike went into effect last April, the increase was blamed for stalling the economic recovery, and the government decided to delay the second phase, initially planned for 2015. Having linked social security reform to the tax increase, the government now finds it difficult to proceed with the former. What it needs to keep in mind is that a restructured social security system is a precondition for stable and inclusive growth.

As the first major welfare state outside the West, Japan is confronting an unprecedented challenge as it struggles to restructure its social security system while coping with demographic aging on a level that other countries have yet to encounter. Refitting the Japanese-style employment-based system for the twenty-first century is an undertaking of global import, and the world will be watching closely to see the outcome of this experiment.